23 January 2016

In its policy note on the combat of tax fraud of 3 December 2015, the Belgian Finance Minister sheds light on the implementation of the BEPS action plan in Belgian legislation.

The action plan in this policy note focuses on the root causes of tax fraud to link them with specific action points. Here is a brief overview of the highlights.

Transfer Pricing

Documentation requirements under the BEPS-report

With a view to transparency, the BEPS report introduces a three-tiered standardised approach to document transfer prices:

  • A “master file” providing tax administrations with high level information regarding their global business operations and transfer pricing policies;
  • A “local file” specific to each country, documenting on transactions related to intragroup transactions;
  • A country-by-country report containing information on the global allocation of income, the taxes paid in countries where the company group is established, a brief description of the professional activities of each of the group companies and other relevant economic indications.

The purpose hereof is to present to the local tax authorities a full and correct picture of the activities in order to allow them making a thorough risk analysis of the transfer pricing activities. 

Implementation of documentation requirements into Belgian tax legislation

At present the Belgian tax legislation does not provide for documentation requirements regarding transfer pricing activities. This is in contrast with many other countries that already make use of master and local files. In addition there is a general consensus within the OECD/G20 to make the country-by-country report compulsory.

Belgium now intends to integrate at least two of the three-tiered documentation requirements into the Belgian tax legislation in the following manner:

  • The country-by-country report will be required in case of a consolidated turnover of at least EUR 750 million in the hands of the parent company;
  • The threshold for reporting cross border intragroup transactions would be EUR 500,000 in the previous financial year.

These thresholds aim to restrict the administrative burden of companies. Companies that exceed the threshold will have to enclose the additional reporting requirements by means of a separate annex to the corporate income tax return. Entry into force will likely be financial year 2016. 

Other highlights

The policy note also includes a number of other highlights with a view to implementing the BEPS action plan in the Belgian tax legislation with a focus on a fair tax system:

  • Belgium is fully supporting the measures on the international exchange of information and exchange of tax rulings. In this respect, the Finance Minister points out that Belgium is already spontaneously exchanging information with other countries on its unilateral cross border rulings;
  • The revised OECD transfer pricing guidelines resulting from BEPS Action Points 8,9,10 will be applied in future transfer pricing audits, focussing on transactions involving intangibles, contractual arrangements which are not supported by the activities actually carried out, etc.;
  • Hereto, the Belgian tax administration intends to further strengthen its team of transfer pricing inspectors. For tax audits, files will be selected based on data-mining techniques and risk-profiling. In this respect, the tax administration will invest further in software tools and trainings in order to evolve to a central data-warehouse that can be used by all departments to perform risk assessments;
  • The Minister emphasises the importance of efficient dispute resolution mechanism and puts forward a 24-month timeframe for resolving Mutual Agreement Procedures and EU Arbitration Convention Procedures, as prescribed by BEPS Action Point 14;
  • CFC legislation is not yet foreseen, but Belgium has been monitoring transactions with non or low taxed countries and will investigate whether additional legislation is required for this purpose;
  • A new interest deduction limitation based on the EBITDA/interest ratio will likely be introduced based on the BEPS Action Point 4, to limit the deductibility of excessive interest payments. This ratio will exist simultaneously with the existing thin cap regulation (5:1 debt/equity ratio);
  • In view of the outcome of BEPS Action Point 7, a new circular letter will widen the application scope of the notion “dependent agent”. Action Point 7 tends to modify the definition of permanent establishment to avoid the artificial avoidance of permanent establishments.

Proactive health check

The policy note clearly indicates that Belgium fully endorsed the BEPS Action Plan and will undertake the required action based on the three BEPS mainstays: substance, coherence and transparence. Internationally active companies are therefore advised to perform a proactive health check of their business and to map out their tax and transfer pricing position.